Is VINCI (EPA: DG) a risky investment?
Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Mostly, VINCI SA (EPA: DG) carries the debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for VINCI
What is VINCI’s net debt?
The graph below, which you can click for more details, shows that VINCI was in debt for € 31.3 billion in December 2020; about the same as the year before. However, it has € 11.9 billion in cash to offset this, leading to net debt of around € 19.4 billion.
A look at VINCI’s liabilities
According to the last published balance sheet, VINCI had liabilities of € 33.5bn less than 12 months and liabilities of € 34.7bn over 12 months. On the other hand, it had cash of € 11.9 billion and € 12.8 billion in receivables within one year. It therefore has liabilities totaling 43.5 billion euros more than its combined cash and short-term receivables.
That’s a mountain of leverage even compared to its gargantuan market cap of € 54.8 billion. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
VINCI has a debt to EBITDA ratio of 3.7 and its EBIT covers its interest expense 5.2 times. Overall, this implies that while we wouldn’t like to see debt levels rise, we believe it can handle its current leverage. Above all, VINCI’s EBIT has fallen by 52% over the past twelve months. If this decline continues, it will be more difficult to pay off the debt than to sell foie gras at a vegan convention. There is no doubt that we learn the most about debt from the balance sheet. But it is above all future results that will determine VINCI’s ability to maintain a healthy balance sheet for the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, VINCI has generated very solid free cash flow at 95% of its EBIT, above our expectations. This puts him in a very strong position to pay off the debt.
Our point of view
In our opinion, VINCI’s EBIT growth rate and its net debt to EBITDA certainly weigh on this. But its conversion from EBIT to free cash flow tells a very different story and suggests some resilience. Taking all of the above factors into account, we believe that VINCI’s debt presents risks for the company. So while this leverage increases returns on equity, we wouldn’t really want to see it increase from here. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Please note that VINCI displays 4 warning signs in our investment analysis , you must know…
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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